Private mortgage insurance costs homeowners insurance premiums ranging from $250 to $1200 per year. In fact, laws require any loans for more than 80% of the home’s Fair Market Value carry PMI. And, the insurance is NOT tax deductible.
A way to stash the extra cash is an 80/20 home mortgage. The combination uses one loan for 80% of the home’s FMV, and a second mortgage for 20% of the home’s FMV as a down-payment.
The second loan is either a fixed-rate home equity loan where the interest rate stays the same during the entire mortgage term or a home equity line of credit where the interest fluctuates with rates set by the Federal Reserve. The variable rate could also provide cost savings. Some experts think the rate could be up to 5% lower than a traditional fixed-rate mortgage.
During previous years, homeowners sometimes unknowingly continued to pay PMI even when the loan amount dipped below the 80% FMV. New PMI laws cited by the Federal Reserve require mortgage lenders to help you keep track of when the loan amount hits below the 80% mark.
“When making mortgage payments, most of the payments during the first few years are finance charges. Therefore, it can take 10 to 15 years to pay down a loan to reach 80 percent of the loan value. If the home prices in your area are rising quickly, your property value may increase so that you can reach the 80 percent mark a lot faster. Your property value could also increase due to home improvements that you make to your home.
If you think your home value has increased, you may be able to cancel PMI on your mortgage. Although the new law does not require a mortgage service to consider the current property value, you should contact them to see if they are willing to do so. Also, be sure to ask what documentation may be required to demonstrate the higher property value.”
An 80/20 loan or “piggyback loan” allows homeowners to avoid paying PMI premiums. The interest of both loans is fully tax deductible whereas mortgage insurance is not. The loans allow for higher debt ratios, convenient in higher home buying markets.
One downside to the 80/20 loan, is if the home’s FMV decreases, the loans require a pay-off before the homeowner may sell.
You can read more Connor articles about home mortgages and refinancing online. To get specific terms and interest rates, please visit the Home Equity Loan Rates Center. If you need more lending advice about sub-prime refinance loans with, take a look at Bad Credit Home Equity Loans. Please visit these helpful resource For the latest debt consolidation solutions, please visit the Debt Consolidation Loans.
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